On October 2, 2019, Governor Gavin Newsom signed California’s Public Banking Act, AB 857, into law. California previously prohibited cities and counties from extending credit to any person or corporation, and required that local agencies deposit all funds to state or national banks. AB 857 now permits cities and counties to establish a “public bank,” which is defined as “a corporation [organized as either a nonprofit mutual benefit corporation or a nonprofit public benefit corporation] for the purpose of engaging in the commercial banking business or industrial banking business, that is wholly owned by a local agency, local agencies, or a joint powers authority . . . .”
A city or county in California interested in establishing a public bank must create a separate corporation with an independent board of directors and obtain approval from the Federal Deposit Insurance Corporation (“FDIC”) for deposit insurance. The city or county must also obtain a certificate of authorization to transact business from California’s Department of Business Oversight and conduct “a study to assess the viability of the proposed public bank.” AB 857 caps the number of public banks in California to no more than two new licensees per calendar year, and no more than ten in existence at one time. California joins North Dakota as the only other state to allow public banks.
Under the new law, cities and counties may lend available funds to public banks, deposit funds in public banks, and invest in public banks, subject to certain requirements. In addition, public banks in California are authorized to make distributions to local agencies that are shareholders of the public bank. Public banks are required to conduct retail activities in partnership with local financial institutions, and are prohibited from competing with local financial institutions. Specifically, public banks can only engage in retail activities without partnering with a local financial institution if those retail activities are not offered or provided by local financial institutions in the jurisdiction of the local agencies that own the public bank.
In practice, supporters expect public banks to use local revenues as a deposit base for nonprofit, community-based lending at lower interest rates than private banks. Critics of public banks caution against the government becoming involved in the business of banking, which they argue may result in inefficiencies, corruption, and self-dealing.